Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Final Report
Prepared by Azimut Inclusive Finance SPRL
November 2016
Azimut Inclusive Finance SPRL TVA : BE 0555.784.066 www.azimut-if.com – [email protected] Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Table of Content
EXECUTIVE SUMMARY 3
1 CONTEXT 4
1.1 BACKGROUND 4 1.2 RATIONALE OF THE STUDY 4 1.3 SPECIFIC OBJECTIVES 4
2 FINANCIAL SECTOR AND REGULATORY ENVIRONMENT 5
2.1 BRIEF OVERVIEW OF THE FINANCIAL SECTOR IN RWANDA 5 2.1.1 FINANCIAL SERVICES PROVIDERS 5 2.2 THE MICROFINANCE SERVICE SECTOR 7 2.2.1 THE CONCEPT OF MICROFINANCE 7 2.2.2 THE MICROFINANCE SERVICE PROVIDERS 7 2.2.3 THE INFORMAL SECTOR 8 2.3 FINANCIAL INCLUSION 10 2.4 RELATED POLICIES AND LAWS 12 2.4.1 POLICY ENVIRONMENT 12 2.4.2 MICROFINANCE POLICY, LEGAL FRAMEWORK AND SUPERVISION 13
3 MICROFINANCE PRODUCTS AND SERVICES AND FLR EFFORTS 15
3.1 EXISTING PRODUCTS AND SERVICES 15 3.1.1 COMMERCIAL BANKS 15 3.1.2 MICROFINANCE INSTITUTIONS (MFIS) 19 3.2 ADAPTABILITY OF THE MICROFINANCE PRODUCT AND SERVICES TO SUPPORT FLR INITIATIVES (IN GATSIBO AND GICUMBI) 25 3.2.1 OPPORTUNITIES TO SUPPORT FLR INITIATIVES THROUGH MICROFINANCE INSTITUTIONS 25 3.2.2 CHALLENGES TO SUPPORT FLR INITIATIVES THROUGH MICROFINANCE INSTITUTIONS 28 3.2.2.1 Challenges related to the microfinance sector 28 3.2.2.2 Other challenges relating to the funding of FLR activities 29
4 RECOMMENDATIONS 30
FINANCIAL TERMS AND DEFINITIONS 35
ANNEXES 36
2
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Executive Summary Rwanda has made international challenges, notably in terms of credit commitments via the Bonn Challenge to management policies, product restore 2 million hectares of degraded development, weak staff capacities and land. In this context, IUCN is working hand low customer literacy levels, to name a in hand with Rwanda Natural Resources few. MFIs show great potential in terms of Authority (RNRA) on a project to promote outreach but serious challenges in terms of the restoration of mosaic landscapes and product design and adequate enhance carbon stocks in Rwanda. methodologies to mitigate credit risk.
This ambition not only requires all sectors Such barriers could easily be overcome by of society to support the national selecting providers that show serious restoration efforts but also a myriad of potential and strategic commitment and by financing solutions. Of all possible providing them with technical assistance financing mechanisms, this report looks at and support. The report highlights several the potential role that Microfinance initiatives that pave the way and provides institutions and their (inter)national recommendations on the process to financial supporters could play to channel develop tailored products. funding to smallholder farmers to invest in FLR initiatives. Smallholder farmers, on their end, are aware of the importance and benefits of Rwanda defines agroforestry and investing in FLR initiatives but lack the improving woodlots’ productivity as access to tailored products with reasonable central pillars of its FLR initiative. Given the terms and conditions, have little to no short-term nature of Microfinance, the knowledge on sustainable agriculture report focuses on the potential of having practices and reported to have limited Microfinance Institutions (MFIs) fund access to a variety of quality seeds. agroforestry. Despite the challenges of funding FLR The Rwandan microfinance industry is initiatives, the report highlights there are strongly supported by the government several opportunities that can be seized: which highly values its contribution to build MFIs are open to innovate but lack an inclusive financial sector. Financial resources and capacity, notably in the agro- inclusion in Rwanda is indeed the second sector; Experts have proven the gains of highest in Africa. sustainable agriculture practices, and; Smallholder farmers are already organized The sector comprises just under 500 in (in)formal groups and there are formal institutions, offering good outreach across channels that could be used to provide the territory, and is supported by a strong training and awareness raising. regulatory framework. Most MFIs do currently fund agriculture activities yet few While the development of an agroforestry have invested in the development of policy would certainly contribute a long suitable methodologies and tailored way, it should not refrain MFIs in their products to fund FLR initiatives. efforts to innovate and refine their product Performance varies greatly from one MFI offer. to another yet many face common
3
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
1 Context 1.1 Background IUCN in partnership with Rwanda Natural Resources Authority (RNRA) is implementing a project on “Piloting Multiple Benefit Investment Packages through forest/landscape restoration and REDD+ in Rwanda for Scaling up in Africa” in the two pilot districts of Gatsibo and Gicumbi. The project aims to promote the restoration of mosaic landscapes and enhance carbon stocks in Rwanda as well as deepen commitments to FLR across Eastern Africa. The project further aims to stimulate increased public and private investment in Forest Landscape Restoration (FLR) at community, district, national and regional levels by creating opportunities to enhance access to finance for farmers. This study gathers detailed information on microfinance services, products, risks, barriers, and recommend interventions to unlock the financing opportunities for individuals and groups at the community and district levels.
1.2 Rationale of the Study The purpose of the study is to evaluate how microfinance services recognize the national restoration agenda and can enable individual women and men farmers, groups/cooperatives and communities to invest in FLR in the pilot landscapes of Gatsibo and Gicumbi districts of Rwanda. The study includes a review of the microfinance sector with particular emphasis on a variety of community financing programs and brings to light the opportunities, prospects and challenges of financing forest landscape restoration projects, paying specific attention to gender differences in the microfinance sector.
1.3 Specific Objectives The specific objectives are as follows: 1. To gain a broad overview of the Microfinance service sector in Rwanda and the financial environment in general, related to the current level of understanding of, support to, and investment in forest landscape restoration activities, including differentiated information on the access, use, control and role in regard to gender and age group where appropriate and if information readily available; 2. To evaluate the existing microfinance products and services and their adaptability to support the restoration efforts of individual women and men, small holder farmers, community based groups and institutions at the whole community level. 3. To develop practicable recommendations on unlocking access to finance for individual women and men, groups, and communities in the Gatsibo and Gicumbi districts that aim to invest in FLR.
4
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
2 Financial sector and Regulatory environment 2.1 Brief overview of the financial sector in Rwanda The Rwandan financial system comprises Banks, Non-Bank Financial Institutions (NBFIs - mainly insurance and pension funds) and Microfinance Institutions (MFIs), which are regulated and supervised by the National Bank of Rwanda (BNR). In the context of the study, we will exclusively focus on Banks and Microfinance Institutions.
2.1.1 Financial Services Providers Banks regulated by BNR are divided into 4 categories: 1. Commercial Banks 2. Development Banks 3. Cooperative Banks 4. Microfinance Banks As of today, the Rwandan banking industry includes eleven commercial banks and six specialized institutions (including four microfinance banks, one development bank, and one cooperative bank):
11 Commercial Banks ACCESS Bank Rwanda Ltd – formerly BANCOR, Bank of Kigali Ltd, Banque Populaire du Rwanda Ltd (BPR), BRD Commercial Bank Ltd, COGEBANQUE Ltd, Crane Bank Rwanda Ltd, Ecobank Rwanda Ltd – formerly BCDI, Equity Bank Rwanda Ltd, Guaranty Trust Bank Rwanda Ltd – formerly FINA Bank Rwanda (ex BACAR), I&M Bank Rwanda Ltd - formerly Commercial Bank of Rwanda (BCR), Kenya Commercial Bank Rwanda Ltd (KCBR); 1 Development Bank Development Bank of Rwanda (BRD) 1 Cooperative Bank: ZIGAMA CSS (initially created as a microfinance institution in 1997) 4 Microfinance Banks: AB Bank Rwanda Ltd, Bank of Africa Rwanda Limited (BOA Rwanda) formerly Agaseke Bank Ltd, Unguka Bank Ltd, Urwego Opportunity Bank (UOB)
The National Bank of Rwanda is also mandated to regulate and supervise Microfinance Institutions (See 2.2 The Microfinance service sector).
The national financial sector remains strongly dominated by Commercial Banks, which account for 66.9% of the total assets of the sector (BNR, June 2016). The banking market is highly concentrated: the three largest banks (Bank of Kigali, BPR and I&M Bank) account for almost 60% of assets, loans, and deposits.1 The sectors that benefit the most from banking loans are mortgage industries and trade & hotel activities, which represent respectively 33% and 31% of loans. The Agriculture sector accounts for merely 2% of loans in June 2015 (June 2014: 3%)2.
1 Source: BNR, Annual Financial Stability Report, June 2014 – June 2015. 2 Source: BNR, Annual Financial Stability Report, June 2014 – June 2015. 5
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
In comparison with banks, the microfinance sub-sector is still small, but increasing. As of June 2015, its share in total assets was 6.3%, up from 5.6% in June 2014. Trade and hospitality account for 36,4% of total microfinance loans, followed by construction and real estate activities with 31,9%. (Source: BNR, 2015)
Financial service providers typically tend to operate along major infrastructural development axes. Financial services are therefore unevenly distributed. In particular, rural areas are still underserved and competition remains limited, despite the latest developments of the Umurenge SACCOs.
Access of women and youth Mobile banking and Internet Banking Although access to loans has been With regards to mobile financial services, increasing, the women and youth access between 2013/14 and 2014/15 Mobile levels remain low. In FY 2014/15, the total Payment subscribers and transactions number of individuals who accessed loans volume increased respectively by 76.7% from the banking sector increased by 10% (from 3,826,997 to 6,763,467) and 163% (from 110,482 to 122,005). Despite this (from 79,577,837 to 209,132,834) while increase, women accounted for only 34% number of Mobile Banking subscribers and (41,756) of total number of people that transactions volume increased respectively accessed loans. In terms of total amount by 37.6% (from 552,027 to 769,497) and (value) of loans distributed, in the first six 132.6% (from 3,579,084 to 8,326,257). months of 2015, the total new authorized Mobile financial services are likely to impact loans amounted 147.14 billion― women on the business model of banks and accounted for 23% (33.81 billion Frw), the microfinance institutions. The lower cost of youth (age below 35 years) accounted for transaction will potentially contribute 31% (45.0 billion Frw). Source: BNR, 2015. improving access to finance. Source: BNR, 2015.
With regards to the number of agents for mobile payments all over the country, the number was 35,863 at the end of June 2015 comparing with 13,671 agents at the end of June 2014. It is important to highlight that mobile network operators (MNOs) have introduced innovative products that promote financial inclusion and increase the cashless payments. Those products include mobile saving in partnership with banks, whereby within two months as end June 2015, 16,000 customers opened bank accounts using mobile payment channel and saved FRW 277 million. Other products include payments of water bills, tax, fuel at petrol stations, school fees, etc.
Regarding the usage of internet banking, the number of subscribed remained almost the same with an increase of 4% (from 32,460 to 33,750) while the number of transactions registered a significant increase of 194% (from 222,867 to 656,309) between the years 2013/14 and 2014/15.3
3 Source: BNR, Annual Financial Stability Report, June 2014 – June 2015. 6
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
2.2 The Microfinance Service sector
2.2.1 The concept of microfinance The BNR defines microfinance as follows4: activities that are characterized by at least one of the following operations: 1. extending loans to a clientele that is not able to have access to loans offered by the banks; 2. accepting saving deposits from a clientele not usually served by banks and ordinary financial institutions; 3. extending loans or accepting saving deposits from a clientele not usually served by banks and ordinary financial institutions Yet, in Rwanda, microfinance services are provided by a variety of financial institutions: Microfinance institutions, SACCOs, but also – in spite of the above definition which tends to exclude banks providing microfinance products - Microfinance Banks and, more recently, commercial banks who see microfinance as a profitable business opportunity with solid growth potential.
Article 19 of the Microfinance Law states the following activities may be performed by MFIs: 1. Delivery of remunerated services providing advice and training to members or clients; 2. Microinsurance5 operations; 3. Transfer of funds operations for client accounts made within the same institution or network; 4. External transfer of funds operations, not denominated in foreign currency, with banks and other registered financial institutions; 5. Purchase and sale of currencies.
2.2.2 The microfinance service providers On top of the commercial and Microfinance Banks providing microfinance products and services, the Rwandan microfinance industry comprises 492 institutions:
12 limited companies Atlantis, Amasezerano Community Banking, Caisse des Affaires Financières Isonga, COPEDU Ltd, Duterimbere IMF, Goshen Finance, Inkingi Microfinance, Letshego Rwanda, Réseau Interdiocésain de Microfinance; SagerGanza, Vision Finance, Umutanguha Finance Ltd
64 SACCOs licensed The full list can be downloaded from by BNR http://www.bnr.rw/index.php?id=252 416 Umurenge The full list can be downloaded from SACCOs http://www.bnr.rw/index.php?id=252
4 Microfinance Law No. 40/2008 5 See Financial terms and definitions p.37. 7
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
From a legal perspective, a SACCO is a microfinance institution created under the legal status of cooperative, meaning that it provides financial services exclusively to members and the contribution of members in the share capital is the same. A Limited Company is a microfinance institution created by individuals, or by a company, who do not necessarily contribute equally in the share capital. Its services are not limited to its shareholders.
Both are generally very socially oriented and offer small loans to underprivileged clients. The relative weight of small loans (defined as loans under RWF 5 million/USD 6.6 thousand) over the total outstanding portfolio varies from institution to institution.
Mobile money providers probably don’t identify themselves as microfinance services providers but they do provide financial services as they offer services to save and carry out financial transactions. The three Rwandan operators (Tigo, MTN and Airtel) offer services to save using mobile wallets. They should thus be considered as microfinance providers for all clients using their basic services, which are not linked to credit or savings products offered by MFIs.
These Mobile Money Providers can also enter in partnerships with financial institutions to offer alternative delivery channels to reach out to a wider audience. Both Banks and microfinance institutions (i.e.: UOB, Vision Finance) have launched mobile services such as (mobile-based saving product, loans, mobile wallet, transfers and cash withdrawals).
2.2.3 The informal sector Aside from the formal institutions, there are a variety of informal initiatives, which are not regulated. The uptake of informal mechanisms over the last few years is mostly driven by Saving Groups (VSLA/SILC6, Tontine/Ikimina): 3.3 million adults save through savings group and 2.6 million borrow money from the saving groups7. It is noteworthy that several initiatives in the likes of CARE8 and HOPE tend to link informal groups with Financial Institutions.
PROVINCE GRADUATED SUPERVISED EASTERN 1,023 7,494 KIGALI CITY 444 458 NORTHERN 364 4,553 SOUTHERN 780 8,261 WESTERN 370 4,276 GRAND 2,981 25,042 TOTAL
Source : www.savinggroup.bnr.rw
6 Village Savings and Loans Association / Savings and Internal Lending Communities. 7 Source: Financial Inclusion in Rwanda, Finscope, 2016. 8 For more information on linkages, please see: http://www.care.org/sites/default/files/documents/ECON-2013- CARE-%20Connecting-the-worlds-poorest_0.pdf 8
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Saving groups (SGs) and community financing schemes are widespread in Rwanda. A recent initiative aiming to map saving groups in Rwanda, based on a survey involving 12 International NGOs and 30 Local NGOs, showed that between 2010 and 2014 a total of 28,023 saving groups were created. SGs’ total membership is 669,751, of which 80% are women. Among the created groups there are 2 categories: Supervised (SGs that are still being monitored on a regular basis) and Graduated (SGs that are independently carrying out their activities).
In Gatsibo and Gicumbi, there are 63,440 SG members, of which 73% are women.
Connecting VSLAs to Financial institutions – CARE’s experience (Rwanda) Over the last years, CARE has tested eight innovative models for linking informal savings groups with financial institutions in 5 African countries. CARE’s major challenge has been finding cost-effective ways to connect the people who participate in informal community savings groups to banks and other financial institutions. CARE’s Village Savings and Loan Association (VSLA) model has proven to be one of the world’s most effective, allowing members to save flexibly, access loans to invest in small businesses, and build a social fund to strengthen their ability to cope financially with unexpected events such as an illness in the family. As groups mature, many seek the security of a bank account to hold their growing savings, or wish for larger loans than the group can provide. To respond to these needs, CARE established partnerships with a range of companies to explore models for connecting savings groups with formal financial services.
In Rwanda, it teamed up with Vision Finance Company (VFC), the microfinance arm of World Vision, to offer savings and small loans specially designed for poor people in rural areas. It took VFC 11 years to build its portfolio of 17,000 clients in Rwanda, but after just six months of linking to VSLAs, its customer base had grown by 6,000 people. Moreover, the groups almost never missed a loan repayment. Despite these encouraging results, transaction costs remain high, but the advent of mobile banking and the possibilities opened by the vast networks of rural agents used by mobile network operators may provide an answer for the future. With only 13 branches, VFC was not the largest player in Rwanda, but its experience of working with small groups of savers, coupled with its mission to provide loans to poor people – and particularly women – in rural areas, made it an attractive partner for CARE. For VFC it was an opportunity to expand its client base and to experiment with a new business model to reach poor communities. VFC offered two main products adapted specifically for savings groups: a group savings account with 4% annual interest and no set-up or monthly fees, and a loan product with a 2.5% monthly interest rate, four-month term, and 3% commission. CARE used its Linkage Readiness Assessment Tool to identify suitable savings groups, then VFC and CARE provided training on the VFC products, the requirements for opening a savings account and the somewhat more stringent requirements for a loan.
Source: Connecting the World’s Poorest People to the Global Economy – New models for linking informal savings groups to formal financial services, CARE, February 2013.
9
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
The interviews the consultants conducted with the Belgian Technical Cooperation (BTC) and with One Acre Fund revealed that other informal groups (Twigire Muhinzi) were also mobilizing savings: Farmer Field School (FFS) groups (71% of FFS groups have internal savings) and Farmer Promoters (FP) groups. FFS groups represent about 200,000 farmers (53% women) and FP groups comprise 1,100,000 farmers.
2.3 Financial Inclusion The latest Finscope survey (2016) reveals 89% of adults in Rwanda are financially included (including both formal and informal financial products/services), around 5.2 million individuals. Financial Inclusion(2016) Banked 26% Other formal (non-bank) 65% Informal only 72% Excluded 11%
Type of Financial Institutions (Supply)
Colored by Percentile Groups (Demand)
Source: www.finclusionlab.org
According to the 2016 Finscope survey9, 72% of adults in Rwanda use informal mechanisms; that is about 4.2 million people. It is also interesting to note that 76% of individuals who use formal financial products also use informal mechanisms (up from 66% in 2012).
The below graph illustrates the important role MFIs (non-bank FIs) play in extending the overall levels of financial inclusion, particularly in rural areas and among women.
9 Financial Inclusion in Rwanda, Finscope, 2016. 10
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Access by Area Type and Gender Access by Age Group (2016) (2016)
5% 9% 7% 7% 6% 12% 13% 13% 11% 27% 17% 21% 21% 19% 24% 31% 24% 25% 14%
45% 40% 43% 39% 46% 44% 37% 35%
58%
29% 32% 29% 20% 24% 25% 24% 24%
Access in Access in Acces by Access by 51-60 41-50 31-40 18-30 16-17 Urban Rural Male Female years years years years years areas areas Excluded Informal only Excluded Informal only Other formal (non-bank) Banked Other formal (non-bank) Banked
Source: Financial Inclusion in Rwanda, Finscope, 2016.
Access to Finance in Gicumbi and Gatsibo
FI outlets in Gicumbi: 26 SACCOs (21 FI outlets in Gatsibo: : 15 SACCOs (13 UMURENGE SACCOs), 12 Banks, 3 UMURENGE SACCOs), 11 Banks, 4 MFIs (2 for RIM Ltd. and 1 for Vision MFIs (2 for RIM Ltd. and 1 for Vision Finance). Finance and 1 for Duterimbere).
11
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
2.4 Related Policies and laws
2.4.1 Policy environment FLR has been identified by the Government of Rwanda and its partners as one of the key approaches for sustainable land management and for the achievement of agricultural sustainability.
In 2011, Rwanda committed to restore 2 million hectares of degraded land as a pledge toward the Bonn Challenge, a global commitment to restore 150 million hectares of degraded land by 2020. This targets restoration across the whole country. To meet this commitment, the Ministry of Natural Resources (MINIRENA), through the Rwanda Natural Resources Authority (RNRA) and other agencies have been working to further FLR, in collaboration with several partners. Rwanda places Agroforestry as the central pillar of its FLR initiative10.
Vision 2020 added several topics to the cross-cutting issue on natural resources, environment and climate change, namely: explicitly identifying climate change as a major environmental problem – and mitigation as mandatory. The consultants note Vision 2020 also focuses on promoting intensification of agriculture to increase productivity.
To operationalize Vision 2020, the country’s overall national development strategy, the Economic Development and Poverty Reduction Strategy (EDPRS)11 was introduced. It sets out a medium-term framework for the achievement of Vision 2020. Agriculture is a priority sector of the Vision 2020 policy document and EDPRS states “agroforestry (…) will be supported by MINAGRI to help harness the sustainability of farming systems”. The Strategic Plan for the Transformation of Agriculture in Rwanda (Phase III) released in 2013 highlights the contribution of agroforestry to reducing erosion and increasing the economic returns from the land. Among others, reference is made to the objective of having up to 90% of farmers use agroforestry by 2017.
In October 2011, Rwanda released the Green Growth and Climate Resilience National Strategy for Climate Change and Low Carbon Development. This is a comprehensive document that envisions Rwanda as a climate-resilient, developed country by 2050. Considering the lack of available land to expand forests and plantations, it recognizes agroforestry as a mean to provide wood for fuel and social protection while avoiding deforestation. It also recognizes the multiple benefits of agroforestry.
However, experts agree there has been a slow uptake of agroforestry, linked to a lack of supervising Ministry. Agroforestry falls under the responsibility of the Ministry of Agriculture and Animal Resources (MINAGRI) - who also has a crop intensification program based on monoculture approach12 - but the Ministry of Natural Resources (MINIRENA) has been a longstanding supporter through the Rwanda Natural Resources Authority (RNRA)13 although with limited resources and little coordination with MINAGRI and the Rwanda Agriculture Board (RAB). At a recent workshop of agriculture and agroforestry experts (June 2015),
10 Source: Forest Landscape Restoration Opportunity Assessment for Rwanda, September 2014, MINIRENA, 11 Source: http://www.rdb.rw/uploads/tx_sbdownloader/EDPRS_2_Main_Document.pdf 12 Source: http://www.minagri.gov.rw/index.php?id=31 13 Source: http://rnra.rw/index.php?id=39 12
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments stakeholders examined the role of agroforestry and recommended MINAGRI should be responsible to promote agroforestry with the support of MINIRENA for the supply in seeds, plants and technical advice. To the consultants’ knowledge, there is no Policy/Strategy for FLR and Agroforestry in Rwanda.
Lack of access to finance is among the major challenges for the green economy transformation in Rwanda. The National Fund for Climate and Environment (FONERWA) was thus set up in 2012 and officially launched in 2014 and charged with attracting and streamlining finance, and leveraging private investments for green initiatives.
To the consultants’ knowledge, there are no specific financial policies to incentivize financial institutions to finance green initiatives. None of the commercial banks in Rwanda refer to an Environment, Social and Governance (ESG) strategy14 on their websites but seem to rather have a Corporate Social Responsibility (CSR) strategy, which often has an “Environmental Sustainability” component15.
2.4.2 Microfinance Policy, Legal Framework and Supervision The primary institutions with specific mandates for financial regulation in Rwanda include the National Bank of Rwanda (NBR) and the Rwandan Cooperative Agency (RCA) while the Ministry of Finance and Economic Planning (MINECOFIN) plays a role in policy making.
The Ministry of Finance and Economic Planning (MINECOFIN) is responsible for the Microfinance Policy16, which was published in August 2013.
The overarching vision of the Financial Sector Development Program II (FSDP II) is to develop a stable and sound financial sector that is sufficiently deep and broad, capable of efficiently mobilizing and allocating resources to address the development needs of the economy and reduce poverty. To achieve that, FSDP II comprises four main programs: Financial inclusion; Developing financial institutions, markets and the supporting infrastructure; Investment and savings to transform the economy; Protecting consumers and maintaining financial stability.
The financial inclusion program provides the background for the Microfinance Strategy. Microfinance and financial inclusion continue to be a top priority for Rwanda. The recent document outlining the second Financial Sector Development Program (FSDP II) states: “All the programs and sub-programs of FSDP II are important, but the most crucial are: Broadening and deepening financial literacy; the Umurenge SACCO strengthening program; Increasing investment in small enterprises, agriculture and housing; Building capacity in the financial sector; Strengthening RSSB governance, administration, investment and risk management.”
14Note: In 2014, WWF published a guide that provides banks with a toolkit to develop an ESG strategy and an operational framework to integrate ESG issues into their practices. 15 Bank of Kigali, for example, says it will invest part of its annual operations budget in supporting efforts by a local non-profit environmental conservation organization to plant one million trees in Nyagatare District. 16 http://www.minecofin.gov.rw/fileadmin/templates/documents/National_Microfinance_Policy_Implementati on_Strategy.pdf 13
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
The key focus is to contribute to financial inclusion of Rwandans financially excluded, which has to be achieved through the efficient and responsible provision of a broad variety of microfinance services by sustainable financial institutions to a wide range of clients, including the economically active poor, urban and rural microenterprises and other groups in a dynamic microfinance market.
The National Bank of Rwanda is mandated to regulate and supervise Microfinance institutions. Microfinance institutions include Savings and Credit Cooperatives (SACCOs) and some limited companies that operate microfinance activities. The supervision is conducted through three main activities: licensing of MFIs, off-site surveillance and on-site inspection of MFIs thus licensed.
The activity of supervising Microfinance Institutions (MFIs) by the National Bank of Rwanda is based on the Law n° 55/2007 of 30/11/2007 governing the Central Bank of Rwanda, the Law n° 40/2008 of 26/08/2008 establishing the organization of microfinance activities and its implementing Regulation n°02/2009 of 27/05/2009
The law provides four categories of institutions: Institutional Type Level of Regulation 1 Informal Microfinance Institutions Not subject to licensing by the BNR. (such as tontines) 2 Savings and Credit Cooperatives with a Governed by laws on saving and credit value of deposits below RWF20 million cooperatives. Have to comply with (USD 27,000) simplified prudential norms defined by the BNR. 3 Savings and Credit Cooperatives with a Required to operate under the rules and value of deposits higher than RWF20 prudential norms defined by the BNR. million (USD 27,000) and Limited Corporations providing saving and credit services 4 Credit only Institutions Have to comply with simplified prudential norms defined by the BNR.
The National Bank of Rwanda supervises licensed institutions through the risk based supervision framework for onsite and offsite surveillance where banks report monthly. The supervisory tools used in supervising banks and MFIs include: offsite surveillance methodologies such as CAMELS model that stands for Capital Adequacy, Asset quality, Management quality, Earnings, Liquidity, and Sensitivity to market risk; onsite inspections: for the purpose of assessing risk management quality and compliance; and Risk Based Supervision.
There are no limitations on interest rates 17 , which financial providers are free to set. However, BNR recommends interest rates should be market-based 18 and should enable
17 Note on concessional loans: rather than applying concessional loans, IUCN could consider applying market rates and offer benefitting parties to not repay the last installments if the previous installments have been repaid well. 18 Commercial banking prime rate in Rwanda: 17,2% (31 December 2015 est.) – Source: CI World Factbook, October 2016. 14
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments institutions to operate in a sustainable manner thereby lowering dependence from donors and government subsidies.
3 Microfinance Products and services and FLR efforts
3.1 Existing products and services The below section gives a broad overview of current microfinance products and services, offered by the Microfinance Service Providers. Let’s keep in mind the target varies according to the type of financial provider. Commercial banks typically target the higher-end of the market, formal businesses and individuals who can pledge collateral and operate mostly in the urban centers. Microfinance Institutions (MFIs) target the lower-end of the market (i.e.: informal businesses and groups, smallholder farmers, etc.) and the people excluded from the banking sector.
Microfinance Service Providers offer a variety of products and services which can be categorized as follows:
Transactional products/services – current accounts, debit cards or basic savings accounts, which could be used for transactional purposes, mobile banking services, etc. Savings products/services – Long and short-term products – i.e. basic savings accounts, fixed deposit accounts, etc. Credit products/services - Loans Microinsurance - Risk management products from formal institutions Financial Education – Training of client on basic financial concepts. In the framework of the study, and in line with IUCN’s objective to channel funding to smallholder farmers to invest in Forest and Landscape Restoration (FLR) initiatives, the consultants have specifically focused on the microfinance product and services: credit products (agriculture), micro-insurance and financial education.
3.1.1 Commercial banks Commercial banks typically do not target smallholder farmers and tend to have a minor focus on agriculture (which would typically include FLR initiatives); yet one of the Vision 2020 objective is to have banks invest at least 20% of their portfolio in the agriculture sector. Banks are typically more focused on the urban centers and offer limited coverage of the rural areas (see 2.3.1. above). Banks do offer microloans but the collateral requirements are much stringent compared to what MFIs require, which de facto excludes the poor smallholder farmers. All commercial banks the consultants met with did fund agriculture activities but none of them demonstrated interest in investing in FLR for smallholder farmers. The main reason being the high-risk perception, driven by longer payback periods. Banks typically finance export crops,
15
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments which are well organized, such as tea and coffee, and value chains19. KCB Bank, for example, finances the value chains of rice, maize and Irish potatoes. Banque Populaire du Rwanda offers an Agricultural Loan through its national network of almost 200 branches. It is meant for any type of agricultural activity; production, processing or distribution. (purchase of farm inputs, tools, machines, agro-processing, livestock farming, farm related expenses, etc.). The amount depends on the client’s repayment capacity and the duration can be up to 5 years. There are however two major burdens to reach smallholder farmers: The client has to raise 20% of the cost as own contribution and the collateral should be equivalent of 125% of the financed project. KCB Bank was found to be quite dynamic in the development of it agriculture portfolio. They have partnered with IFC and AFR – who among others provided guarantee schemes - to expand their agriculture lending operations. About 25% of KCB’s loan portfolio is invested in the agriculture sector (RWF 25 billion)20. KCB offers 5 agricultural loan products, which are designed to fund working capital and acquisition of fixed assets (see below). According to the Agribusiness Manager of KBC Bank, the maximum interest rate charged on agriculture loans is 19,75% and for loans disbursed to cooperatives with a guarantee covering 75% of the loan, KCB charges 9%. KCB’s agriculture loans all come with a mandatory insurance, the cost of which is to be covered by the client. Insurance cost is very high at 8,25%. KCB has partnered with the insurance company “Union des Assurances de Paris” UAP21. The following table gives an overview of KCB’s agriculture lending offer:
19 See Financial terms and definitions p.37. 20 Interview with the Agribusiness Manager of KBC Bank. 21 Interview with the Agribusiness Manager of KBC Bank. 16
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Product Name Description Benefits Qualifying Criteria Zamuka Muhinzi Micro finance product targeting farmers in One bullet payment at the end of season; To be engaged in crop production Loan small scale farming (Value chain financing Joint surety of the members (group lending); value chain related activities; product) in rice, maize and Irish potato Loan tenure up to 24 months; To have minimum of 1 year value chains. The loan granted to the experience in crop production farmers is the Working Capital facility related activities; available for purchasing agricultural inputs To be cooperative member; (seeds, pesticides, fertilizers) or paying various operating expenses associated with agribusiness. Asset Finance in KCB grants agriculture loans to the farmers Loan amount: Minimum: 3.5 million and the Soil testing result approved by the Horticulture Sub- who are seeking to purchase greenhouses maximum depends on the customer repayment specialized company in sector Greenhouse from specialized Companies. capacity. greenhouse technology. Technology Flexible repayment term: up to 5 years. Additional security required. Grace period offered. BDF Guarantee. Inventory Credit The facility is granted to the cereals This facility allows cooperatives or other To have the storage facility which Facility cooperatives (rice, maize, wheat etc.). The commodity owners, to receive financing against meets the requirement standards 22 (Warrantage ) facility enables the cooperative to buy the the value of the deposited crop while delaying to store crops. harvest from its individual sales of the crop until a future point in time when Have storage facilities which meet members/farmers at harvest period who prices are expected to increase. the requirement standards to need money in order to begin farming No security required; the facility is secured by the store crops. activities for the new season. stored crops. Contract Finance The facility is granted to Agribusiness Easy Access to the finance facility to allow the Signed contract to supply crops to Facility customers who have the contract for customer to meet contract obligations; the specialized trader; supplying crops to the specialized traders. Loan amount: Minimum: 3.5 million and the To have the standardized storage maximum depends on the customer repayment facility; capacity;
22 See Financial terms and definitions p.37. 17
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
To be supported by Postharvest Handling and Storage Project Electronic Allow farmers to get financing against the stock Be a member of Electronic Warehouse of commodities in warehouse while waiting warehouse receipts operator Receipts Finance better price in the future; (EAX); (eWRsF) The quality and quantity of harvest to be kept for Have commodities in warehouse long time (9 months) in certified warehouses; to be discounted; Risk of deterioration of commodities and storage Being KCBR client; related risks transferred to third party (Collateral manager); To get financing in 24 hours upon presentation of electronic warehouse receipts to the bank; No other security required; No business plan required; Source: KCB Bank.
18
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
3.1.2 Microfinance institutions (MFIs) Rwandan MFIs provide both group and individual lending. Group loans are typically designed to target the most vulnerable clients, particularly women, generally without formal collateral. Clients then use solidarity guarantee instead of fixed assets to access loans. A recent assessment of the supply side of the Rwandan Market23 claims majority of the microloans disbursed are individual loans. According to this study, the share of group loans has constantly decreased overtime as they are perceived as risky by MFIs 24 . The group methodology has shown to be less effective especially in urban areas, where groups are very difficult to monitor as members move very quickly across the country for business reasons, whereas groups formed in rural background are more stable and the peer pressure mechanism has proven to work better. Most agriculture loans are indeed group loans (i.e. UOB’s agriculture clients are cooperatives (99%) and groups (1%) exclusively). Urwego Opportunity Bank, Equity Bank, Vision Finance Company, Amasezerano Community Banking, Sager Ganza and Duterimbere offer the traditional group lending approach. The maximum loan size disbursed to each group member vary between RWF 100,000 and RWF 300,000. The clients who need larger loans ask for individual microloans. For some institutions, the solidarity guarantee is sufficient, while others (e.g. Urwego Opportunity Bank) encourage group members to produce other forms of collateral, mostly land titles. Other institutions (e.g. Umurenge SACCO, COOPEC Inkunga) use the variant of this approach, by lending to organized formal groups such as cooperatives and associations, registered with local authority or Rwanda Cooperative Agency. The study also reveals the attitude towards group lending is mixed. MFIs all offer similar products, most of which are designed for business purposes. In most cases, the product segmentation is based on the main characteristics of the economic sectors targeted (e.g. Agriculture, Construction, Transport, Trade/Business and other), but with little differentiation in the terms and conditions. Microfinance loan terms range between 8 and 12 months. For overdrafts and salary loans, the terms can be very short (a couple of days), whereas investment loans (i.e.: to acquire machinery) go up to 7 years and housing loans can go up to 15 years. There is room to refine MFI’s product offer and progressively shift from a supply-driven approach towards a demand-driven approach. A limited number of MFIs offer specific agricultural loans (i.e.: specifically designed to a specific crop). The major reason explaining the reluctance of MFIs to invest in agricultural activities is because they are perceived as very risky. Several of the MFIs the consultants met with have indeed faced serious losses over the last years on their agricultural operations. Refining the lending methodologies will certainly contribute to lower exposure and mitigate risks. Other solutions such as micro-insurance could also help lower the risk for financial institutions. Of the few MFIs that have started refining their agricultural product offer, some have benefited from the financial and/or technical support of international NGOs such as ICCO
23 Source: www.afr.rw - Assessment of the Rwandan Microfinance Sector Performance, Microfinanza Rating, 2015. 24 In the consultants’ experience, the success of group loans is highly correlated with the methodology and the capacity of the loan officers. 19
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Terrafina 25 or BRS 26 . Access to Finance Rwanda (AFR) 27 has also supported Urwego Opportunity Bank and RIM Ltd to set up agriculture finance units.
RIM’s Agriculture Finance Unit was started in 2014 and has 2 staff with agronomy background based in head office. The objective of this unit is to analyze the value chains and the different types of crops and assist the loan officers on the ground with their appraisals. The idea is to help mitigate the risk of financing agricultural activities and improve portfolio quality. RIM’s big challenge is that loan officers still do not have the agronomy background and find it difficult to adequately appraise the funding requirements and structure the loan products. Agriculture Loan Portfolio of RIM in Gatsibo and Gicumbi is under RWF 200 million for just above 1,200 loans with a Portfolio at Risk over 30 days (the outstanding loans with an overdue of more than 30 days) estimated at less than 3% (Source: RIM)
UOB set up a similar unit in 2014 and has 15 staff of which 3 are based at head office and the remaining 12 are on the ground. They do land profiles and analyze different crops (Maize and Rice) and assist loan officers with the appraisal of loan applications. Challenges remain though as UOB’s agriculture loan portfolio is of poor quality with a Portfolio at Risk over 30 days estimated at 30% (Source: UOB).
AsNone far as of pricing the two is MFIsconcerned, have an MFIs agri -arelending usually manual reluctant of procedures to disclose with product supporting information tools toand fees,appraise which the makes crops it difficult they fund. to haveThere a transparent are no specific picture products of the perpricing crop. of Cropsloans. typicallyThe latest assessmentfunded by MFIsof the are: Rwandan Irish Potatoes Microfinance (UOB startedsector reveals a pilot thetest lending in April rates2016), (nominal) Bananas, fluctuateBeans, betweenRice and 18Maize and. 30%; whereas the banking market rate fluctuate between 17 and 19%. Microfinance interest rates are sometimes set arbitrary as MFIs generally lack the expertise and tools to conduct cost/revenue analysis per product that could help define a more balanced and responsible price structure for the products offered. High interest rates certainly represent a burden for poor smallholder farmers to access loans.
Microfinance loan products in Rwanda have the following key characteristics:
Typically invested in income generating activities; Many microfinance loans are collateral-based and there is room to improve cashflow- based lending; Target the lower-end of the pyramid (individuals, groups, cooperatives); Loan terms range between 8 and 12 months with frequent repayments (monthly); Nominal interest rate very between 18 and 30% and are not based on a cost/revenue analysis; The product design is rarely tailored to specific activities (i.e.: loan structure not in line with business cashflows);
The major challenges MFI claim they face with the funding of agriculture (which includes FLR initiatives) can be listed as follows.
25 http://www.icco-cooperation.org/en/countries/rwanda 26 http://www.brs.coop/en/Microfinance/Microfinance 27 http://www.afr.rw/ 20
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
MFIs recognize having little internal expertise (qualified staff) to understand the agriculture operations (the business cycle, farming methods, the cashflow, the price of inputs, the risks involved, etc.) and thus design appropriate products to mitigate the risks (adjust loan amounts, repayment frequency, assess expected harvest income, etc.). Risk aversion remains thus important. This could either be relieved through training and technical assistance or through guarantee mechanisms or micro- insurance products where the MFI bears a smaller part of the risk in case of default. Access to affordable and effective micro-insurance products is an issue. RIM has just started pilot-testing a micro-insurance product with ACRE Africa in Nyagatare (195 clients). Several MFIs noted funding resources were a problem (i.e. Umurenge SACCO, Vision Finance Company, BPR). Most MFIs funding agriculture use the group methodology and fund cooperatives and informal groups. However, MFIs see Cooperatives as challenging clients with weak governance, poor management and poor leadership. Weak financial literacy is another challenge. “Results from the FinCap Survey administered in 2012 suggest some important capabilities challenges that Rwandans face in terms of numeracy, cash flow management, future planning, and financial service use. Looking at numeracy, less than half of Rwandans can give correct answers to all four numeracy questions, which test addition, subtraction, multiplication, and division. The FinCap results also suggest there is a disconnect between Rwandans’ knowledge or awareness of cash management practices and their behaviour. For example, 90 percent of Rwandans say they “prefer to budget carefully” but only 39 percent of Rwandans say they actually budget; and many of those that do budget do not follow that budget. Furthermore, fewer than half of Rwandans know how much they spent in the previous week, suggesting that many are not tracking their money.”28 On the other side - the demand-side - the following table describes how clients perceive MFIs’ current product offer. Six (6) focus group discussions (FDGs), totaling 55 individuals, were formed by IUCN and interviewed by the consultants29. Credit related characteristics Clients’ Perception Interest rate and other costs Perceived as high; between 2 and 5% a month (flat); many other costs (management fees, collateral valuation/registration, notary fee, transport to the MFI’s branch, etc.) Collateral requirement Perceived as a barrier to access. Valuation cost of collateral can go up to RWF 40,000 with no guarantee to receive a loan. This tends to discourage clients that need to
28 The National Financial Education Strategy, August 2013 - http://www.minecofin.gov.rw/fileadmin/templates/documents/National_Financial_Education_Strategy.pdf 29 The sample is most likely not representative yet contributions seem to confirm the findings of the market assessment study that was conducted in 2015 and interviewed 452 clients. 21
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
borrow smaller amounts, as the cost is proportionally higher. Upfront compulsory savings Perceived as a high cost, especially when not earning interest; this is all the more true when MFIs deduct the compulsory savings from the loan amount approved. Group lending Clients’ perception is that it is not effective. In most cases it is the solidarity mechanism that does not work properly, which might be related to the lack of training of the groups. Repayment frequency Some MFIs seem to not take the business cycle / cash flows into account and ask for weekly/bi-monthly/monthly repayments. For agriculture, MFIs do offer end-term loans, which should coincide with harvesting season. Timely disbursements Participants indicated some institutions take too long to process loan applications (up to 2 months), irrespective of the business cycle / seasonality of the client’s business.
The consultants note other clients’ needs are currently unmet by MFIs, such as: financial education, micro-insurance and business development services. Although MFIs might not be the perfect delivery channel, there is little doubt such products or services can contribute to the further development of access to finance: Financial education will help clients to better manage their financial resources and make more informed decisions. Micro-insurance, especially for agriculture loans, could help increase the investments in agriculture activities of smallholder farmers. Business Development services or technical advice would, for example, help smallholder farmers to engage in more sustainable and more productive and resilient agriculture.
The following table gives an idea of where MFIs stand with their agriculture product offer:
22
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
23
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
UMURENGE SACCOs KCB BK BPR Is agriculture part of the Business Strategy n.a. but most SACCOs YES YES YES of the institution do fund agriculture Does the institution offer financial products to support agriculture YES ( but not specific) YES YES YES ( but not specific) Agriculture Loans Zamaka Muhinzi Loan; Asset Finance in Agriculture loans are Horticulture Sub-sector advanced to finance Loan is meant for any Greenhouse farmers’ requests for type of agricultural n.a. Technology; agricultural activity activity; production, Warrantage; Contract which could be processing or Fiannce Facility; production; processing distribution. Electronic Warehouse or distribution. Receipts Finance Specific agriculture loans (designed for a - - Mostly Coffee and Tea n.a. specific crop) What part of the loan portfolio is currently invested in agriculture n.a. 25% n.a. n.a. What is the target in the strategic business plan? n.a. n.a. n.a. n.a. Does the institution provide financial education services NO NO NO NO Does the institution offer micro-insurance NO Insurance (UAP) n.a. n.a. products Does the MFI have a gender approach n.a. NO NO NO Does the MFI target youth with specific products n.a. NO YES n.a. Does the MFI work in Gatsibo YES NO YES YES Does the MFI work in Gicumbi YES NO YES YES Does the MFI have specialized loan officers Yes (3 - recruiting 6) n.a. n.a. with agronomy background Does the MFI engage in linkages with Not anymore NO NO community financing mechanisms 24
3.2 Adaptability of the Microfinance Product and Services to support FLR initiatives (in Gatsibo and Gicumbi) The key question to address here is whether MFIs represent a good vehicle to channel funding to smallholder farmers looking to invest in Forest and Landscape Restoration. To this end, it is important to define what FLR initiatives are. Rwanda defines agroforestry and improving woodlots’ productivity as central pillars of its FLR initiative:
Woodlots – IUCN’s study on FLR Opportunity Assessment for Rwanda reveals that there is significant potential to improve productivity from existing woodlots. The challenge with financing woodlots is that it takes many years before the trees start generating income. -> By nature, woodlots are thus not a typical activity that microloans would easily fund.
Agroforestry – Agroforestry initiatives seem more in line with the characteristics of microloans offered by MFIs. The assumption that should be tested is that the crops grown by the farmer will generate sufficient cash to cover the additional cost of planting trees. Further research should help define what type of trees would be needed where, for what purpose and with what type of crop it could be mixed (i.e. Coffee trees and Macadamia trees). Such research should help assessing the funding requirements this would imply (acquire the trees, grow and nurture them, etc.) and the expected returns, which should enable to assess feasibility.
If funding requirements are in line with the typical characteristics of microloans and if smallholder farmers are a privileged target, Microfinance institutions would most likely represent a good vehicle. Selecting the most suitable MFI will largely depend on the financial product to be channeled, its network, its strategic orientations and commitment towards sustainable agriculture, and its capacity to manage the product and ensure proper monitoring and reporting.
3.2.1 Opportunities to support FLR initiatives through microfinance institutions There are several opportunities IUCN could build on to develop the financial support of FLR initiatives:
MFIs have large networks that will enable to deliver financial services to smallholder farmers in Gatsibo and Gicumbi o Duterimbere, RIM and Umurenge SACCOs are operational in the two districts; o Vision Finance Company is present in Gicumbi. A selection of MFIs place agriculture high up in their business plan and are adjusting their operations accordingly. o UOB and RIM have set up specific operational units, staffed with agronomists and agro-economists to better serve the agriculture segment. International NGOs are supporting MFIs to analyze and finance specific value chains: o ICCO Terrafina works with 5 MFIs: Umutanguha, Duterimbere, Ejoheza, Amasezerano and Inkunga; o They analyze and help MFIs fund value chains such as Maize and Rice;
25 Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
o A team of agronomists elaborates reference factsheets on the various crops to help MFI design appropriate and specific agriculture loan products; o They are working on the analysis of the Irish Potatoes value chain; The Business Development Fund (BDF) is an independent government entity established in collaboration with the Rwanda Development Bank (RDB), a government- owned bank focusing on providing long term credits for development projects in Rwanda. The main objective of BDF is to implement the access to finance to every entrepreneur in any type of activities (even creation). The consultant note BDF partnered with 450 MFIs in Rwanda to ease agriculture financing, and offers a guarantee program that guarantees activities all along the agriculture value chain. Moreover, BDF assists entrepreneur to build their project and then facilitate their credit application submission at MFIs level. BDF also supports financial inclusion and business development in Rwanda through: o Climate resilient agribusiness and post-harvest support project: this program is intended to promote investments in growing of beans, irish potatoes, maize and dairy products in some districts (including Gatsibo) o SACCO refinancing: Rwanda SACCOs can benefit from a loan to support their operations o Quasi Equity product: mix of debts and equity for the benefit of SMEs o Advisory services: investment advisory (start of business), capacity building (both for entrepreneurs and MFIs/SACCos) Smallholder farmers are already aware of the basic advantages of planting trees (to fight against landslides), which should contribute to the uptake of agroforestry microloans; o All participants of the FDGs confirmed they had some trees on and/or around their plots; Many smallholder farmers are already organized in formal and informal groups. IUCN could use these to channel specific training/sensitization programs on agroforestry, sustainable agriculture mechanisms, tree planting, etc. o Field Farmer School (FFS) groups represent about 200,000 farmers (53% women) o Farmer Promoters (FP) groups or “Twigere Muhinzi” comprise 1,100,000 farmers
26
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
FFS facilitators, who are among key drivers along the seasonal campaign, are intensively trained by qualified FFS Master Trainers through RAB and the ministry’s partners. Training takes place in the field with as principle: The field is the school and the plant is the teacher! As part of the training process, facilitators work with their own FFS farmer groups where they facilitate the ‘learning by doing’ process and supervise season long experiments in the FFS field plot of the group. All members of the group work and learn together in this plot. And this ‘learning by doing’ approach equips farmers with practical skills that enable them to increase their yields significantly. For instance, a recent impact assessment revealed that banana production has tripled in some areas thanks to extension services and knowledge acquired through FFS. General figures indicate that 75% of the farmers in FFS groups increased their production by more than 50%. The FFS Facilitators of each district have already formed a cooperative of FFS Facilitators to be able to work as professional service provider in agricultural activities in the district. For example for Gatsibo and Gicumbi districts, the cooperatives are called KOTAMUGA and KONUGI, and they have already acquired the official papers from RCA (Rwanda Cooperative Agency). More information here. With the 3-party contracts signed between facilitators’ cooperatives, Districts and RAB; the FFS facilitators commit to create more than 3600 new FFS groups with an expected 90,000 members in season 2016. They also commit to train all farmer promoters in how to set up demonstration plots at village level.
Whilst this is beyond the scope of the study, the consultants noted there were some tree nurseries in Gatsibo and Gicumbi, which is a sign there is demand. Interviewees reported that the quality and variety of the plants/seeds proposed were rather limited, which the consultants were unable to verify but this seems to indicate there is room to strengthen them; A few MFIs, such as Vision Finance Company and Urwego Opportunity Bank, are developing mobile banking solutions that should help improve outreach in the future; A variety of Loan Guarantee funds30 to facilitate access to finance of smallholder farmers, managed by the BDF: the agricultural guarantee fund 31 put in place by MINAGRI, the Women Guarantee Fund, etc. The consultants also note AFR, together with KCB Rwanda, has piloted an Agricultural Credit Guarantee Scheme (ACGS) to address constraints on access to financial services by the sector. In the pilot phase the facility (USD 235,000) was designed to support 13 cooperatives on a demand-driven basis, enabling over 12,000 farmers to access ready markets for their commodities and to minimize on-farm storage risks and losses. The pilot was found to be satisfactory, with failure to reach the target number of beneficiaries deemed to be part of the learning curve and reflective of prudent resource allocation to mitigate risk32. While Loan Guarantee Funds contribute to ease access to finance for small holder farmers, the consultants note they often do not address the key barriers of access. In many cases, indeed, major constraints that block access to credit are the lack of
30 See Financial terms and definitions p.37. 31 Source : http://www.minagri.gov.rw/fileadmin/user_upload/documents/Agricultural_Finance_Facilities/ AGRICULTURE_GUARANTEE_FUNDS.pdf 32 Source : http://www.afr.rw/wp-content/uploads/2015/11/KCB-Agricultural-Credit-Guarantee-Scheme- Evaluation.pdf 27
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
relavant products, trained staff and an outreach strategy. When these conditions are in place, the guarantee can help the right financial service provider lend to these sectors but it must have a strategic interest in lending to farmers. More challenging, however, is the risk that the publicity of guarantee funds misguides the borrowers as they might consider the loan to be a grant or gift. This is all the more true in a context where beneficiaries are used to receive grants. Ideally, the borrower should not be aware that their loan is under guarantee. Yet borrowers are expected to pay a guarantee fee or an admin fee. Considering the Client Protection Principles in Microfinance, the borrowers should be informed of the existence of the Loan Guarantee Fund. Lenders often transfer the fees onto borrowers through higher interest rates.
3.2.2 Challenges to support FLR initiatives through microfinance institutions
3.2.2.1 Challenges related to the microfinance sector Based on its own experience working in Rwanda as well as on the findings of market assessments studies, the consultants can conclude the Rwandan Microfinance sector still faces important challenges that can be summarized as follows:
1. Lack of appropriate skills and limited capacity to provide sustainable microfinance products and services – MFIs face the challenge of attracting and retaining qualified profiles. There is often a mismatch between the staff hired and the key skills required. 2. Microloans remain heavily based on collateral rather than on client’s repayment capacity (cashflow analysis) – this does not encourage loan officers to perform a thorough assessment of clients’ businesses and exposes the MFI to over-financing a client, thereby exacerbating the risk of over-indebtedness. 3. Lack of appropriate risk management systems - most MFIs are characterized by inappropriate risk management frameworks and tools and therefore their capacity to identify, monitor, measure and manage risks is weak. This weakness is often related to poor MIS and poor internal capacities on risk management. 4. Low transparency levels on pricing - Effective Interest Rate (EIR) or Annual Percentage Rate (APR) are important elements of a transparent loan agreement. Ideally, the loan contract should include the total cost of the loan expressed as APR and MFIs should duly inform clients of lending terms and conditions. 5. Poor product design - In general, microfinance products should be convenient (e.g. in terms of geographical proximity, user-friendly opening hours), accessible (e.g. limited paperwork and bureaucratic procedures, good distribution channels including mobile money) and affordable. The need to develop increasingly flexible and responsive financial products is one of the most compelling challenges for institutions operating in the microfinance space: limited companies, SACCOs and banks alike. There is a need to adapt the right products and services to fit different segments of the population, especially in a country with a high youth population. Most institutions offer an acceptable level of flexibility in terms and conditions within their product range. However, the problem is twofold. On the one hand, the existing features of any given product (which per se are relatively flexible) might not be carefully designed around the real needs of clients. 28
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
6. Lack of research and awareness on the benefits and opportunities of informal savings practices – Despite NGOs efforts to promote linkages between informal saving groups and MFIs, there is room to further exploit this potential. A recent workshop at AFR’s initiative was organized in October 2016 to raise awareness of MFIs. On the ground, MFIs’ staff confirmed the existence of informal saving groups but mentioned not all were very active. 7. Weak financial literacy of clients – as mentioned earlier, remains a challenge refraining the uptake of microfinance products and services. It is noteworthy that of the 55 people the consultants interviewed, less than 20% had received financial literacy training.
3.2.2.2 Other challenges relating to the funding of FLR activities Potential for demand from MFI’s clients linked with sensitization efforts First and foremost, FLR initiatives in general - and agroforestry or sustainable agriculture practices in particular - are rather new concepts about which smallholder farmers have little knowledge. As such, it is difficult to say there is an existing demand for microloans to fund FLR initiatives. Yet experiences and experts have demonstrated the value added of agroforestry and how it contributes to more sustainable and more productive agriculture. The consultants thus assume that demand for such microloans will appear once farmers have been sensitized and exposed to the benefits of agroforestry or sustainable agriculture.
Designing specific products to support and promote agroforestry should thus be preceded by the sensitization of smallholder farmers. The uptake of more sustainable agricultural practices will help better understand clients’ needs and will contribute to the design of a pilot product.
Poor survival of planted trees According to a study conducted by Rwanda Environmental Conservation Organization (RECOR), the problem is that the mortality of planted trees is very high33. The most important causes of poor survival were damage of animals or people, climate, lack of monitoring, poor selection of seeds, poor timing of planting and poor planting techniques. Sometimes farmers may deliberately kill young trees if they are competitive to their crops to achieve a proper yield. Species choice, spacing and the location of woodlots or public forests in relations to famers’ fields need to be considered appropriately and only high value trees which fit in the existing farming system should be introduced in the communities. There is a need to create a sense of ownership in local people and to sensitize them on the value of forests and reasons which can cause plantation failure.
Interference of programs and projects offering free trees To ensure a microfinance product will not be associated with donations and government/NGO supported initiatives, IUCN ought to carefully think about the packaging of a potential microfinance agroforestry/FLR product. Failing to do so might compromise the good repayment behavior of clients. As such, and if tests demonstrate the value added of agroforestry / more sustainable farming practices, the product ought to be designed to contribute to higher productivity levels of smallholder farmers and the value-added in the medium- long-run on climate resilience. The product should rather be promoted by MFIs and
33 Source : http://www.rwandaenvironment.org/portfolio/tree-planting-in-rwanda 29
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments initiatives promoting smallholder farmers (i.e.: FFS). The more clients perceive the value for themselves and their plots, the more they will be prepared to pay for the trees.
Among others, the consultants note a variety of initiatives aiming at planting trees for free: IUCN One Acre Fund34 Vi Agroforestry35
4 Recommendations
The above analysis shows opportunities and challenges to financially support FLR initiatives of smallholder farmers. As illustrated, it seems there is a serious potential for agroforestry microfinance products as well as potential financial services providers to channel funds. Duterimbere IMF Ltd., RIM Ltd., Vision Finance Company, Umurenge SACCOs and BPR all have branches in Gatrsibo and Gicumbi. This project is highly innovative and requests a pool of expertise and competences especially in the fields of microfinance and agroforestry. Next steps necessary to adequately design a pilot product are described below
Project flowchart
This flowchart describes the financial and non-financial relations between all project’s stakeholders:
MFI
34 https://www.oneacrefund.org/uploads/all-files/One_Acre_Fund_Factsheet_Rwanda.pdf 35 http://www.viagroforestry.org/projects/rwanda/ 30
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Rough example of a product design
Assumptions: The farmer has opened an account with a local MFI The farmer’s need for agriculture input is RWF 100,000 Agro research has proven that planting mango trees will add value to his crop/plot o Ideally, the mango value chain has been analysed and is also financed He will need to plant 20 trees (at RWF 1.500 per tree) – total cost RWF 30,000 A Tree Nursery in his area can provide the seedlings The Tree Nursery has an account with the MFI The product: The farmer contracts a total loan amount equivalent to RWF 130,000: o RWF 100,000 transferred on his account with the MFI o RWF 30,000 transferred on the Tree Nursery account with the MFI . He does not get cash for buying the trees but can provide the nursery with a receipt showing the trees have been paid for. The farmer reimburses the RWF 130,000 loan to the MFI o Repayment schedule in line with crop cycle Items / Options to be considered: o Interest rate charged on trees could be different than interest rate charged on Agriculture inputs; it could be concessional; o A rebate on the interest rate could be offered conditional to the farmer taking good care of the trees (monitoring/auditing to be subsidized by IUCN) o Rebates on interest rates could be proposed if the farmer convinces his neighbour to plant trees around his plot so that the cost of planting trees around farmers’ plots are shared amongst them. o Transport/delivery costs of the tree seedlings should be considered o Loan terms could vary for the tree component (i.e.: duration, grace period, etc.) The consultants propose this draft concept for a product to fund agroforestry. This is just a preliminary that requires further research prior to be considered for testing on the ground. FLR and agroforestry englobe a wide variety of activities that should be carefully reviewed to select those that would be most relevant to IUCN’s ambitions. It would be recommended to start with one or two products, possibly based on the findings of a study on the potential of agroforestry in the 2 districts.
Demand side Target: identify smallholder farmer groups Goal: select mature and strong solidarity groups, where there is no need to require collateral in the form of fixed assets. Focus should be on Twigire Muhinzi groups (FFS and FP) as per their agricultural expertise.
31
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Workplan: o Set up group selection criteria to ensure the quality and reliability of the groups . Age of the group; . Lending history; . Identify a strong individual (leadership) within the group . Agricultural and financial literacy . Etc. o Cover all the gaps in terms of FLR product sensitization, agricultural and financial education Supply side Target: Identify Financial Service Providers (FSPs) to partner with Goal: select a pool of financial providers Incentive for FSPs: IUCN could propose a guarantee mechanism covering part of the risk Workplan: o Set up Financial Service Provider selection criteria . Regional coverage . Expertise in agricultural finance . Expertise working with smallholder farmers . Test FSP’s reputation amongst smallholder farmers (readiness to work with a given FSP) . Etc. o Cover all the gaps in terms of FLR product characteristics, agricultural education, marketing and communication, etc.
A selection of FSPs to test (recommendation to be confirmed): BPR: Large network, agricultural expertise, lower interest rate, good perception from client’s perspective; RIM: Large network, Agricultural unit;
Product design The next step would be to design a product concept and test it on the ground with the selection of financial service providers. This should involve technical expertise in agroforestry and microfinance product design. The process of pilot testing and product refinement generally takes from 6 to 12 months and need to be in line with the crops cycles.
32
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Costing & Pricing
Quantitative Refine the Concept Research: Product ready concept into a Development Prototype for Pilot-Test Prototype Testing
Risk Analysis & Process Mapping
Other recommendations Explore the possibilities and tools proposed by the Climate-smart Lending Platform: o Climate-smart credit products and process design; o Climate-smart credit-coring tool; o Climate-smart Agriculture compliance monitoring tool, using mobile technology; Sensitize, promote and raise awareness of sustainable farming techniques to the youth and children will contribute in supporting environmental friendly techniques in the future. o The consultants met with representatives of UMWALIMU SACCO, the teacher’s SACCO. Teachers, of which many (75%) are also involved in agriculture activities, are already raising awareness on environment issues and could include specific training modules to raise awareness on sustainable farming practices (incl.: Tree nursery at school, involve children in tree planting, etc.) o Another advantage is that members of UMWLIMU SACCO receive their salary on the SACCO account. Should members show interest for an FLR loan, the salary could represent a good guarantee and repayments could be deducted directly from the salary. Conduct a study on the potential of developing agroforestry in Gatsibo and Gicumbi: assess current practices, assess demand-side and supply-side, assess areas of improvement, make recommendations on agroforestry schemes (what tree with what crop in which area); Organize a national conference or workshop to coordinate efforts and encourage synergies. The consultants are under the impression there are various and distinctive initiatives that directly or indirectly promote FLR initiatives (Vi Agroforestry, Clinton Foundation, the “Farmer Managed Natural Regeneration” Project36, the Belgian Technical Cooperation programs, etc.), yet there is little coordination. Greater coordination of such initiatives could help create synergies. IUCN could initiate a national forum on such initiatives.
36 It is a partnership between World Vision, the Australian Government’s aid agency (AusAID), the World Agroforestry Centre (ICRAF), governments and non-government organizations (NGOs) across the East Africa region, notably in Rwanda (Gatsibo and Bugesera) - http://fmnrhub.com.au/projects/fmnr-east-africa/ . 33
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Look at other ways to promote deforestation: Promote clean cooking solutions (micro- leasing loans); Greening value chains (A feasibility study has already been done on the Charcoal value chain37, Fruit trees, Nut trees, etc.)
37 http://www.eco-consult.com/fileadmin/user_upload/pdf/WB_RwandaReport_FULL_FINAL_OCT12.pdf 34
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Financial terms and definitions
Cashflow analysis: consists of analyzing the flows of cash into and out of the business or project over a given period of time. The remaining balance is referred to as the net cash flow at a specific point in time.
Loan Guarantee Fund: is a non-bank financial instrument aimed at facilitating the access of micro, small and medium-sized enterprises (MSMEs) to formal lending through the provision of credit guarantees that mitigate the risk of non-repayment.
Microinsurance: The term "microinsurance” typically refers to insurance services offered primarily to clients with low income and limited access to mainstream insurance services and other means of effectively coping with risk. More precisely, microinsurance is a means of protecting low income people against specific risks in exchange for a regular payment of premiums whose amount is proportional to the likelihood and cost of the relevant risk. The principal distinction from traditional insurance is in the targeting of low income people, which leads to distinct characteristics and objectives, including addressing the specific risks of low income people, affordability and inclusiveness, simplicity and clarity in documentation, accessible processes, and building trust among target clients.
Rebate: A rebate is an amount paid by way of reduction, return, or refund on what has already been paid or contributed. It is a type of sales promotion that marketers use primarily as incentives or supplements to product sales.
Value chain finance: Value chain finance is defined as the flows of funds to and among the various links within a value chain. Stated another way, it is any or all of the financial services, products and support services flowing to and/or through a value chain to address the needs and constraints of those involved in that chain, be it a need for finance, a need to secure sales, procure products, reduce risk and/or improve efficiency within the chain. Value chain finance is a comprehensive approach which looks not only at the direct borrower but rather analyzes the value chain and those within it, and their linkages in order to best structure financing according to those needs.
Warrantage - also known as Inventory Credit or Warehouse-receipt financing: Inventory credit enables farmers to store their crops in a warehouse and use them as a guarantee against credit before they are sold.
35
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
Annexes Findings of the focus group discussions in Gatsibo and Gicumbi In total 6 groups were convened by IUCN staff in the two districts: 5 groups of 10 people and one group of 5 people.
Profile of the participants in the Focus Group Discussions:
All 30 participants of the FGDs in Gicumbi are natives from the Manyagiro Sector; and all 25 participants of the FGDs in Gatsibo are established there since 1994. Age o 36% of participants have between 20-35 years o 36% of participants have between 35-50 years o 28% of participants have over 50 years Gender o 65% were women o 35% were men Occupation o 52 participants (94%) are smallholder farmers o 2 are civil servants o 1 is a musician Plot size o Participants ignore the exact size but it seems it ranges between 0.75 and 2 Ha. This seems above the national average of 0,5 Ha. o 93% of participants own their plot Informal Groups (VSLAs, etc.) o 96% are members of an informal Saving Group (VSLA) o Those SGs have an account with Umurenge SACCOs or Duterimbere IMF Ltd o 90% also are members of informal solidarity groups (with assistance from World Vision and CARE and Farmer Field School (FFS) / Twigire Muhinzi o 56% of participants knew about FFS / Twigire Muhinzi o Participants of Gatsibo were less familiar with these initaitives Financial education o 20% of participants confirmed having received financial education training (from CARE) o All mentioned they would need Financial Education training Other sources of income o All participants have other sources of income than the main activity they engage in (Agriculture): . Livestock (22) . Small business – mostly trade (18) . Beekeeping (5) . Other
36
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
FLR initiatives and Agroforestry :
All participants are familiar with the reforestation program and with the principles of agroforestry 93% of the participants have (many) trees around/in their plots but do not know how many exactly Only 7% of the participants have not planted trees – because they do not own their land All participants are aware of the benefits of planting trees: o Some trees give us medicine (traditional medicine) o They are used for nourishing our cows o They Protect the land against erosion o They help us to build houses o They give us the natural air o The Trees give us rain o They protect us against wind o Some trees give us boards o The trees give us firewood All participants have demonstrated interest in planting trees that will yield other revenues Sources of funding
Sources of funding vary: family, informal saving and lending groups, MFIs 36% of participants have an account with Umurenge SACCO o 80% of them had benefited from a loan (for growing their business, to purchase or renting of land, for farming and even agriculture) o Participants’ perception of Microfinance products and services: . High interest rates . They seize our property and sell it to reimburse themselves (Note: this is the perception of UOB) . They require too many compulsory savings . They deduct management fees (and sometimes compulsory savings) from the loan amount, yet the interest paid is applied to the full loan . Loan processing takes too long with SACCOs and we miss opportunities (between 1-2 months) Of all participants that never contracted a loan with an MFI: o 12 are satisfied with their VSLA loans o 12 cannot access loans due to the stringent requirements of compulsory savings o 14 cannot access loans due to the stringent guarantee requirements o Some of them do not know how to apply for a loan, do not how to use a loan and others refer all MFIs to the bad image left by UOB
37
Evaluation of Microfinance Services and Potential to Finance Forest Land Restoration (FLR) Investments
List of contacts
Contact Person Title / Organization Email Jacques Peeters Forestry Expert / BELGIAN [email protected] DEVELOPMENT AGENCY Raf Somers Co-Manager of the program [email protected] Market Oriented Advisory Service and Quality Seeds / BELGIAN DEVELOPMENT AGENCY Moussa Senge Deputy Program Manager / One [email protected] Acre Fund Rwanda / RAB OAF Partnerships Patrick Mutimura Private Sector Specialist / [email protected] FONERWA Jacques Dusabe Finance Specialist / USAID Private [email protected] Baziga Sector Driven Agriculture Growth (PSDAG) Project Dr. Gatabazi Head of Corporate Banking / Bank [email protected] Emmanuel T. of Kigali Alexis Bizimana Agribusiness Manager / KCB Bank [email protected] Gilbert Habyarimana Cooperatives Inspection Division [email protected] Manager / RCA Faustin K. Zihiga Chief Operations Officer / Urwego [email protected] Opportunity Bank Ross T. Nathan Managing Director / Vision Fund [email protected] Rwanda James Asiba Managing Director / Unguka Bank [email protected] Ltd. Damien Gatera Managing Director / RIM Ltd. [email protected] Charles Kayumba Managing Director / Duterimbere [email protected] IMF Ltd. Jean Nzakamwita Capacity Building and SACCO [email protected] Promotion Senior Officer / Association of Microfinance Institutions in Rwanda (AMIR) Waringa Kibe Country Director / Access to [email protected] Finance Rwanda
38